In important ways, the active fund management model that we know in the UK needs to change.
If we are to meet the changing needs of our clients, and hold our place in a more competitive environment, we need to find a new model of active management. As Abraham Lincoln once said, "The dogmas of the quiet past are inadequate to the stormy present".
Higher requirements, lower returns
What's to be done? Let's start with thinking about our clients' needs. Their goals are changing. They face more complex and more difficult investment challenges. Their investment time horizons are lengthening.
At the same time, we find ourselves in a period when our expectations for future investment returns are lower. In Vanguard's Economic and Market Outlook for 2019, our Investment Strategy Group forecast average annual nominal returns from equities over the coming ten years at 4%. If inflation is 2%, the nominal return is cut in half, leaving a 2% real return. That 2% has to bear the weight of several layers of fees, such as advice, platform and fund management charges.
The changing priorities of clients are already being reflected in investor behaviour. The flow of funds from high-cost active to low-cost passive is staggering, with sums amounting to billions of pounds a day, in the US, on Continental Europe and here in the UK. In April this year, funds across Europe saw outflows of £3.9 billion – while passive funds saw inflows of £8.4 billion1.
A new model
What then is the active model that will work in the future? How can we continue to offer our clients the benefits of active management?
Our clients are aware of the need for value for money and we need to ensure that the new model for active funds delivers. The investment debate can no longer be between low-cost passive funds and high-cost active funds. The choice for investors now has to be between low-cost passive and low-cost active.
But low-cost investing is not sufficient in itself to achieve clients' goals. We need to break free of our addiction to short-term performance. Performance is important, of course. But we need to understand that achieving longer-term performance requires much greater depth and sophistication of analysis – of people, philosophy and process. That is where, if we are patient, sustainable performance may arise.
Active investing is not magic – our goal is to generate appropriate returns for clients above the index, where the client is knowledgeable of, and in a position to accept, the inevitable short-term risk associated with that potential added long-term performance.
Lower fees for active management
We are committed to lowering the price of investing, thereby increasing the chances of investment success, for retail investors as well as institutional investors. In line with this commitment, as our funds pass their third anniversary, we have cut the annual fees on our active funds in the UK even further – to 0.48% from 0.6% in the case of our Global Equity, Global Equity Income and Global Balanced funds, and to 0.78% from 0.8% for our Global Emerging Markets Fund.
As Lincoln finished his speech by saying, we need not just to think anew, but to act anew. Thinking and acting anew is about innovation – but innovation is not always about technology. A strong and forward-looking proposition can be just as disruptive.
- Broadridge Financial Solutions
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